Spending spurs state growth to outpace nation

For those who are invested in stocks or real estate, a rise in asset values can make people feel as though they can afford to take greater risks, because they have a bigger cushion to fall back on.

Of course, if they really needed to rely on that cushion — by selling their stocks or their real estate — they might find themselves looking for the exit at the same time as everyone else. And this could strip away much of the padding that people thought would cushion their fall.

This comes to mind in trying to understand why the U.S. economy grew fairly briskly in the fourth quarter of 2013, even as the Massachusetts economy did much better than the nation did.

There is no question that the stock market soared in 2013. When adjusted for dividends, the S&P 500 rose more than 32 percent in 2013. It may be that this big boost to stock portfolios increased consumers' willingness to spend during the holiday season. Perhaps that wealth effect was strong enough to offset a significant headwind to the economy created by last fall's government shutdown and the decline in real estate transactions.

After all, on Jan. 30, the National Association of Realtors said pending home sales fell to their lowest point in December 2013 since October 2011, but economists blamed unusually cold weather for the pullback, so this many not be a permanent tumble.

Overall, the growth drivers outweighed the impeders. The Commerce Department reported Jan. 29 that the U.S. economy grew 3.2 percent in the fourth quarter. Despite "unprecedented spending cuts and the first government shutdown in nearly two decades, strong consumer spending, investments by businesses and a pickup in exports" yielded surprisingly strong growth, The Washington Post reported.

The Obama administration is pleased with the economic progress, but is uncomfortable with the high level of unemployment. Jason Furman, chairman of the Council of Economic Advisors, said, "Economic growth was solid in the fourth quarter, a testament to the resilience of American businesses and families. The private sector's strong performance in the fourth quarter caps off its fastest year of growth since 2003. And over the four quarters of 2013, real GDP grew 2.7 percent, its strongest rate in three years. Nevertheless, the unemployment rate is still unacceptably high, and too many Americans are still looking for a job and fighting to make ends meet."

Moreover, if these forces continue to operate in 2014, economic growth could be much higher. That's because with a budget passed and signed into law, there is a chance that congressional obstruction of the economy may be a thing of the past. And the Post estimates that all that political chaos subtracted a percentage point from GDP growth. So unless debate over raising the debt ceiling throws the economy into reverse, growth above 4 percent could be in the cards for the year.

And the Massachusetts economy grew at an estimated 5.5 percent in fourth quarter, according to the MassBenchmarks Current Economic Index.

The reasons appear to be strong consumer spending and exports. According to Alan Clayton-Matthews, MassBenchmarks senior contributing editor and associate professor of economics and public policy at Northeastern University, "The Massachusetts economy appears to be benefiting from improving conditions in national and international economies, and by increasingly confident households who are demonstrating a willingness to spend."

Massachusetts exporters depend heavily on European demand, and that appears to be turning the corner. Whereas, exports from the state shrank 7.7 percent in 2012, they were up 4.3 percent through November 2013, thanks to "improving conditions in Europe which seems poised to grow in 2014," notes MassBenchmarks.

The state is doing a much better job than the nation in producing jobs that are increasing pay at an eye-popping rate. Twenty-five thousand net new jobs were created in Massachusetts, up 3 percent. Income soared 12.3 percent in 2013 as estimated by withholding tax revenues. And spending on state-taxable items was up 9.2 percent in 2013.

What makes this even more amazing is that the state's 7 percent unemployment rate is higher than the nation's — meaning that the people with jobs are probably huddling closer to the nation's wealthiest who are the beneficiaries of the biggest income gains.

Simply put, Massachusetts residents with the most elite educational backgrounds are getting paid the most and enjoying a spike in incomes that they are spending. And that trend is likely to remain strong during the year. The MassBenchmarks Leading Economic Index for December is projecting 5 percent annual GDP growth in the state in the first quarter and a 4.7 percent rate in the second.

The biggest wild card in this forecast may be the fate of the stock market, which has begun 2014 with some intense volatility due to concerns about emerging markets currencies and a growth slowdown in China and India.

Just as the wealth effect helped the economy at the end of 2013, a reverse wealth effect could slow it down in 2014.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.